Submitted By zimexy

Words 1958

Pages 8

Words 1958

Pages 8

In order to be able to exhaust the measures of yield, the following terms will be of great essence in helping maximum elaboration of the measures.

Coupon: The interest payment sent to the owner of an individual bond, usually twice a year. The coupon rate is the interest rate the issuer promises to pay to the investor. For fixed-income investments, this rate is fixed at the time a bond is issued and doesn't change. Market interest rates: The prevailing interest rates in the bond markets on any particular day. These rates change based on the economy, policies and other factors. There is no single market interest rate. The rates will vary based on the time to maturity for a particular bond, the credit quality of the issuer and other factors.

Market price: The current value of an existing bond if you wanted to sell. This is the price you'd see on your quarterly statements. Market prices can be above (or at a premium to) the par value, or below (at a discount to) the par value, depending on current market interest rates, the promised coupon rate and other conditions.

Maturity: The date that a bond's par (face) value is repaid and interest payments stop. The longer the time to maturity, generally, the higher the interest rate will be—but the higher the risk of a bond's price falling, as well, if market interest rates increase. As time passes and the maturity date approaches, the impact of interest rates declines. The price of a bond, if trading at a discount or premium, will move back toward par the closer the maturity date.

Par: Also known as "face value," par is the amount an investor originally paid for a bond (assuming it was bought new) that will be returned to the investor when the bond matures. The market price of a bond can change after it's issued, for the reasons we've discussed, but the par value never…...

...Bond Yields Interest rates have a big part in determining the yield of a bond. If interest rates rise, the bond will be worth less and if they fall bonds will be worth more. The Yield to Maturity or YTM is the rate of return the lender or borrower will earn if the bond is not sold before its maturity. It can be also referred to as the bond`s yield. In order to be able to calculate the Yield to Maturity, some of the things you would need to know are the current price, the par value, the interest payments, and the maturity date for the bond. A coupon is the stated interest payment made on a bond. The market value will be less than par value if the required rate of return is above the coupon interest rate. Bond will be valued above pay value if the required rate of return is below the coupon interest rate. Also, the lower the coupon rate the greater the interest rate risk. Interest rate risk refers to the risk of fluctuating interest rates. In other words, bond values have an inverse relationship to interest rates. Long-term bonds will have a greater interest rate risk than short-term bonds. Interest rates have a greater impact on long-term bonds because it takes longer for them to mature. Typically, the more you can earn from a bond the more risk there is to it. However, the more risk there is to a bond the more likely either the borrower might default. Bonds have a rating system which gives them a rating based on the......

Words: 1045 - Pages: 5

...BOND VALUATION Bond Bond is a long term contract under which a borrower agrees to make payments of interest and principal, on specific dates, to the holders of the bond Key characteristics: VB = value of a bond/bond price M = par or maturity value of the bond; it is the stated face value of the bond and this is amount that must be paid off at maturity and it is often equal to $ 1.000 INT = coupon payment or dollars of interest paid each year; (Coupon rate x Par value) rk = coupon interest rate; (coupon payment / par value) rd = the bond's required rate of the return; that is the market rate of interest for that type of bond; it is also called the yield N = number of years before the bond matures; maturity date is a date on which the par value must be repaid m = number of discounting periods per year The value of any financial asset - a stock, a bond, a lease, or even a physical asset such as an apartment building is simply the present value of the cash flows the asset is expected to produce. Bond Valuation The cash flows from a specific bond depend on the contractual features meaning the type of the bond. The following general equation, written in several forms, can be used to find the value of any bond, VB. = (1 + ) + (1 + ) + ⋯+ ) (1 + + ) + (1 + ∙ ) = (1 + So, the cash flows consist of an annuity of N years plus a lump sum payment at the end of Year N. 1. Standard coupon-bearing bond Standard coupon-bearing bond =the cash flows consist of interest payment......

Words: 3870 - Pages: 16

...Chapter 10 Bond Prices and Yields Catastrophe bond: Typically issued by an insurance company. They are similar to an insurance policy in that the investor receives coupons and par value, but takes a loss in part or all of the principal if a major insurance claim is filed against the issuer. This is provided in exchange for higher than normal coupons. Eurobond: They are bonds issued in the currency of one country but sold in other national markets. Zero-coupon bond: Zero-coupon bonds are bonds that pay no coupons but do pay a par value at maturity. Samurai bond: Yen-denominated bonds sold in Japan by non-Japanese issuers are called Samurai bonds. Junk bond: Those rated BBB or above (S&P, Fitch) or Baa and above (Moody’s) are considered investment grade bonds, while lower-rated bonds are classified as speculative grade or junk bonds. Convertible bond: Convertible bonds may be exchanged, at the bondholder’s discretion, for a specified number of shares of stock. Convertible bondholders “pay” for this option by accepting a lower coupon rate on the security. Serial bond: A serial bond is an issue in which the firm sells bonds with staggered maturity dates. As bonds mature sequentially, the principal repayment burden for the firm is spread over time just as it is with a sinking fund. Serial bonds do not include call provisions. Equipment obligation bond: A bond that is issued with specific equipment pledged as collateral against the......

Words: 4544 - Pages: 19

...Bonds are appealing to investors because they provide a generous amount of current income and they can often generate large capital gains. These two sources of income together can lead to attractive and highly competitive investor returns. Bonds make an attractive investment outlet because of their versatility. They can provide a conservative investor with high current income or they can be used aggressively by investors who prefer capital gains. Given the wide and frequent swings in interest rates, investors can find a variety of investment opportunities. In addition to their versatility, certain types of bonds can be used to shelter income from taxes. While municipal bonds are perhaps the best known tax shelters, some Treasury and federal agency bonds also give investors some tax advantages. Bonds are exposed to the following five major types of risk: (1) Interest rate risk: This affects the market as a whole and therefore translates into market risk. When market interest rates rise, bond prices fall, and vice versa. (2) Purchasing power risk: This is the risk caused by inflation. When inflation heats up, bond yields lag behind inflation rates. A bond investor is locked into a fixed-coupon bond even though market yields are rising with inflation. (3) Business/financial risk: This refers to the risk that the issuer will default on interest and/or principal payments. Business risk is related to the quality and integrity of the issuer, whereas financial risk relates to the......

Words: 15669 - Pages: 63

...------------------------------------------------- Top of Form Bottom of Form * Bond Markets / Prices * Commentary * Learn More * Overview * Bond Basics * What You Should Know * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites Learn More * Overview * Bond Basics * What You Should Know * Overview * The Role of Bonds in America * Investor's Checklist * Investor Protection * Asset Allocation * Reading Bond Prices In the Newspaper * Understanding Economic Statistics * Bond and Bond Funds * Risks of Investing in Bonds * Rating Changes and Your Investments * Corporate Bankruptcy & Your Investment * Selecting and Working with a Financial Professional * Rising Rates and Your Investments * Tax Tables * Buying and Selling Bonds * Types of Bonds * Strategies * Bonds at Your Stage of Life * About Municipal Bonds * About Government/Agency Bonds * About Corporate Bonds * About MBS/ABS * How to Use This Site * Links to Other Sites What You Should Know * Print * Email Risks of Investing in Bonds All investments offer a balance between risk and......

Words: 2099 - Pages: 9

...Bond Valuation By Anuj Joshi Note 1 Bond Valuation Fixed income paying securities. 1. Theoretical price or value of bond depends upon. i. Coupon Payment : Fixed amount of interest to be received after prescribed frequency. ii. Maturity Value [Unless otherwise given is exam, we should take face value] iii. Discount Rate : It should always be market interest rate 2. What is market interest rate Market interest rate is derived from comparable listed bond. The comparison is based on risk and life of the bond. E.g. If we are valuing a bond which is unlisted and have 5 years of life, then we should look for a bond which is similar in risk profile (i.e. same credit rating)and having similar life. The YTM (Yield to Maturity) of listed bond is called market interest rate The YTM of a bond is nothing but IRR of the bond. 3. Value of a bond = PV of Coupon Amount + PV of Maturity Value [Remember CF and discount rate are before tax] Concept Point: i. Coupon rate is a historical rate and should never be used as a discount rate. In exam, if no other information is available, then only we should assume coupon rate of interest as market rate of interest. ii. Remember, Cost of Capital or Discount Rate is a future concept and it represents opportunity cost on the date of valuation. iii. YTM of a similar bond (i.e. current market interest rate) is the appropriate discount rate for bond valuation. How to value a bond which pays interest at a frequency lower than annually (e...

Words: 2748 - Pages: 11

...Yield Curve and Bond Valuation Name: Lecturer: Course: Date: Yield Curve and Bond Valuation Question 1 and 2 Based on the information retrieved from the Board of Governors of the Federal Reserve System on a 1-month business day, the following information concerning historical dairy interest rates on the U.S treasury was obtained. The rates were picked from the current dates (1st January2012) back to five years a go (1st January 2007). Whereby, if that date was not a business date the preceding date was selected as shown in the table below. |Business Date chosen Five Years Ago |1st January 2007 | |1-month Nominal T-bill Rate on that date |5.02% | |3--month Nominal T-bill Rate on that date |4.79% | |6-month Nominal T-bill Rate on that date |5.11% | |1-year Nominal T-note Rate on that Date |5% | |5-year Nominal T-note Rate on that Date |4.68% | |10-year Nominal T-note Rate on that Date ...

Words: 966 - Pages: 4

...What fundamentals affect the yield of bonds (Singapore market) By: G8 Lee Kang Wee Olivia Tan Daryle-‐alexis Tan Ho Guoming FIIM FNCE 102 Professor Huang Sheng Introduction As an international financial centre with about 11% of GDP from financial services, we felt it would be interesting to find out more about the Singapore money market. Since the start of the new millennium, Singapore’s bond market has taken off and has now one of the most developed bond markets in Asia with about SGD357 billion in 2011 and this number is expected to grow further with more and more money flying into Asia from the West due to various economic situations. One area of high growth is in the Islamic debt area. For the purpose of ......

Words: 3435 - Pages: 14

...Zero-Coupon Yield Curves Implied Forward Rates 7 6.8 6.6 6.4 6.2 6 5.8 5.6 5.4 5.2 5 0 5 10 15 20 25 30 Yields on Coupon STRIPS Estimated from Notes and Bonds (N/B) 7.4 12/13/96 6.9 6.4 5.9 5.4 4.9 4.4 0 5 10 15 20 25 30 6 5.8 5.6 5.4 5.2 5 4.8 4.6 4.4 4.2 4 0 5 10 15 20 25 30 12/15/98 7 6.5 6 5.5 5 4.5 4 0 5 10 15 20 25 30 6.7 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 0 7 6/28/99 6.5 6 5.5 5 4.5 4 5 10 15 20 25 30 0 5 10 15 20 25 30 Yield curves are zero-coupon yields on a bond-equivalent basis; forward rates are instantaneous forward rates implied by zero-coupon yields. Figure 6: Fisher-Nychka-Zervos Method Compared to Coupon STRIPS Zero-Coupon Yield Curves Implied Forward Rates 7 6.8 6.6 8 12/13/96 7 6 6.4 6.2 6 5.8 5.6 5.4 5.2 5 0 5 10 15 20 25 30 Estimated from Notes and Bonds (N/B) Yields on Coupon STRIPS 5 4 3 2 1 0 0 5 10 15 20 25 30 6 5.8 5.6 5.4 5.2 5 4.8 12/15/98 12 10 8 6 4 2 0 4.6 -2 4.4 4.2 4 0 5 10 15 20 25 30 -4 -6 -8 0 5 10 15 20 25 30 6.7 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 0 8 6/28/99 7 6 5 4 3 2 1 0 5 10 15 20 25 30 0 5 10 15 20 25 30 Yield curves are zero-coupon yields on a bond-equivalent basis; forward rates are instantaneous forward rates implied by zero-coupon yields. Figure 7: Zero-Coupon Yield Curve Estimated from Notes and Bonds (12/15/98) 5.8 5.6 5.4 5.2 5 Actual Yields 4.8 Predicted Yields 4.6......

Words: 17254 - Pages: 70

...MEASURING YIELD CHAPTER SUMMARY In Chapter 2 we showed how to determine the price of a bond, and we described the relationship between price and yield. In this chapter we discuss various yield measures and their meaning for evaluating the relative attractiveness of a bond. We begin with an explanation of how to compute the yield on any investment. COMPUTING THE YIELD OR INTERNAL RATE OF RETURN ON ANY INVESTMENT The yield on any investment is the interest rate that will make the present value of the cash flows from the investment equal to the price (or cost) of the investment. Mathematically, the yield on any investment, y, is the interest rate that satisfies the equation. ------------------------------------------------- P = ------------------------------------------------- ------------------------------------------------- where CFt = cash flow in year t, P = price of the investment, N = number of years. The yield calculated from this relationship is also called the internal rate of return. ------------------------------------------------- ------------------------------------------------- Solving for the yield (y) requires a trial-and-error (iterative) procedure. The objective is to find the yield that will make the present value of the cash flows equal to the price. Keep in mind that the yield computed is the yield for the period. That is, if the cash flows are semiannual, the yield is a semiannual yield. If the cash flows are monthly, the......

Words: 9863 - Pages: 40

...Why I like High Yields Bonds 1. Defaults LOW-now & and in the forseeable future are not a significant factor: * Fundamentals-reduced expenses, reducing debt(deleveraging), Diluting stock holders to raise capital-beautiful environment to service debt. “Companies are not expanding they are maintaining” “We have one the best credit quality periods in the HY space U.S. History” 2. Liquidity controlled-Keeping maturities shorter- Having the ability to move out of positions more easily is controlled by shorter maturities. This also helps reduce the effect of interest rate hikes. “We like modest inflation because of our shorter duration-as bonds roll off we can reinvest at better yields” 3. More predictable returns with reduced volatility: * Promise to pay * Increased claims right on company(better than stock, preferreds)-Have been increasing our senior secured positions.-now @35% * In Jan. 2004 the HY prices were a few percent higher on the index than they are now and the return on the index(Merrill Lynch HY Master) in 2004 was 10.76%. * In the last 25 years the index has had 20 positive years and only 5 negative. With a 25 year period return of over 9% * From 1992 thru Jan 1 2009 the standard deviation of HY bonds has been ½ of the SD of the S&P 500(source factset) 4. Non-coorelation to U.S. Treasury * As interest rate rise treasury prices increase and yield declines-our shorter term portfolio enjoy the strength of a......

Words: 314 - Pages: 2

...BONDS AND SINKING FUNDS Amortization of Bond Premiums and Discounts *APPENDIX: The origin and calculation of bond premiums and discounts were discussed in Section 15.2. We will now look at the premiums and discounts from an accountant’s perspective. The point of view and the schedules developed here provide the basis for the accounting treatment of bond premiums, discounts, and interest payments. Amortization of a Bond’s Premium Bonds are priced at a premium when the coupon rate exceeds the yield to maturity required in the bond market. Suppose that a bond paying a 10% coupon rate is purchased three years before maturity to yield 8% compounded semiannually. The purchase price that provides this yield to maturity is $1052.42. The accounting view is that a period’s earned interest is the amount that gives the required rate of return on the bond investment. The interest payment after the first six months that would, by itself, provide the required rate of return (8% compounded semiannually) on the amount invested is 0.08 ϫ $1052.42 ϭ $42.10 2 The earned interest during the first six months from an accounting point of view is $42.10. The actual first coupon payment of $50 pays $50 Ϫ $42.10 ϭ $7.90 more than is necessary to provide the required rate of return for the first six months.7 The $7.90 is regarded as a refund of a portion of the original premium, leaving a net investment (called the bond’s book value) of $1052.42 Ϫ $7.90 ϭ $1044.52 This......

Words: 1917 - Pages: 8

...Property yields as tools for valuation and analysis Rosane Hungria-Garcia in collaboration with Hans Lind Björn Karlsson This report has been sponsored by the Real Estate Academy at the Division of Building and Real Estate Economics. Stockholm 2004 ______________________________________________________ Report No. 52 Building & Real Estate Economics Department of Infrastructure KTH Summary This project was started in order to get an overview of conceptual problems, measurement problems, theories of determinants of yields, the use of yields in different contexts and how the actors on the Swedish market looked upon yields. Important issues discussed in the report is the need for: - Conceptual clarity: A number of different yield terms exist on the market and it is very important to be clear about how the specific terms are defined. - Operational clarity: There are measurement problems both concerning rental incomes, operating and maintenance costs and property values. This means that reported yields can be “manipulated” by choosing suitable operationalisations and pushing estimations of uncertain factors in directions that are favourable to the actor in question. - Specify the purpose for which the yield should be used. The most important distinction is between using yields/income returns for valuation purposes and using yields as benchmarks or bubble indicators. In the first case various types of normalization of the net operating income can be rational. In the......

Words: 19982 - Pages: 80

...Bond Valuation: * How do we use NPV to value bonds? One simply computes the present value of the cash flows at the appropriate rate of return. This corresponds approximately to the full price of the bond (as opposed to the listed price). * E.g.: a one period, $1000 bond, 10% coupon is valued at: $1037 (1100/1.06) if the market rate of return is 6%. The bond sells at a premium. * $1000 if the market rate of return is 10%. The bond sells at par. * $982 if the market rate of return is 12%. The bond sells at a discount. Tentative Conclusions * The higher the appropriate interest rate, the lower the price of the bond. * If the yield matches the coupon , then the bond sells at par. * If the yield is higher than the coupon, the bond sells at a discount. * If the yield is lower than the coupon, the bond sells at a premium Example: * Consider now an infinite bond, paying a 10% coupon, i.e. $100 forever. * Then if the market return is 10% the bond sells at 100/0.1 =1000. * If the market return is 6% the bond sells at 100/0.06 = 1667 * If the market return is 12% the bond sells at 100/0.12 = 833 * A tentative conclusion: it seems that longer maturity bonds are affected more by interest rate swings. * We will modify this conclusion later. Valuing a Bond * If today is October 1, 2010, what is the value of the following bond? An IBM Bond pays $115 every September 30 for 5 years. In September 2015 it......

Words: 1065 - Pages: 5

...FV TVM - INVESTING CONTD. SOLUTIONS STEP 2: WE ARE SOLVING FOR I/Y P/Y =12 NOTE: since you are saving MONTHLY, you must set P/Y to 12 N = 15 X 12 = 180 PV = -100000 PMT = -500 FV = 1500000 SOLVE FOR I/Y = 16.20% 12. USING BOND SPREADSHEET (covered later in course). You want to buy an A rated bond that matures in 15 years. The coupon rate is 8%. The yield on A rated bonds in the same maturity range is 7.5%. What price would you pay for this bond? Corporate bonds mature at PAR. Par = $1000 • Corporate bonds pay interest coupons SEMIANNUALLY. P/Y = 2 • The stated interest rate on the bond is fixed for the life of the bond. This is called the “Coupon rate.” • All bonds are priced to the market yield on bonds of similar type, quality and maturity. This yield is always changing and bonds adjust to it by the price fluctuating. If yields in the market go UP, bond prices go DOWN. SET BGN SET P/Y = 2 N = 30 (Remember N = P/Y times the number of years) I/Y = 7.5 In a bond problem I/Y is the yield on other similar bonds. DO NOT use the coupon rate on the bond. FV = 1000 All bonds mature at par. Par = 1000 PMT = 40 Bonds pay interest semiannually. This bond has a coupon rate of 8%. Annual interest = 8% x $1000 = $80 Each coupon is therefore half the annual interest of $80 or $40 SOLVE FOR PV 1071.32 PROBLEM A loan of $50,000 is due 10 years from today. The...

Words: 1716 - Pages: 7